Midland States Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Amounts are in U.S. dollars. Midland States is an Illinois-based financial holding company operating a bank, wealth management business, and specialty finance activities.
Financial results and key metrics
| Metric | Q1 2022 | Q1 2021 or prior date |
|---|---|---|
| Net interest income | $56.8 million | $51.9 million |
| Tax-equivalent net interest margin | 3.50% | 3.45% |
| Noninterest income | $15.6 million | $14.8 million |
| Noninterest expense | $40.9 million | $39.1 million |
| Provision for credit losses | $4.2 million | $3.6 million |
| Net income / diluted EPS | $20.7 million / $0.92 | $18.5 million / $0.81 |
| Return on average assets / equity | 1.16% / 12.80% | 1.11% / 12.04% |
| Total assets | $7.34 billion | $7.44 billion at Dec. 31, 2021 |
| Gross loans | $5.54 billion | $5.22 billion at Dec. 31, 2021 |
| Total deposits | $6.06 billion | $6.11 billion at Dec. 31, 2021 |
| Shareholders’ equity | $645.0 million | $663.8 million at Dec. 31, 2021 |
Net interest income increased $5.0 million year over year, primarily as lower funding costs and growth in earning assets more than offset lower asset yields. Interest expense declined $2.7 million, partly reflecting prior-year FHLB advance prepayments and redemption of subordinated notes. Net income rose 11.9%; the effective tax rate increased to 24.2% from 22.9%.
Net cash provided by operating activities was $39.1 million, versus $158.4 million a year earlier. Investing activities used $310.8 million, principally reflecting a $317.5 million net increase in loans; financing activities used $76.4 million. Cash and cash equivalents fell $348.1 million during the quarter to $332.3 million. The filing attributes the reduction primarily to funding loan growth.
Material changes and balance-sheet developments
- Gross loans increased $315.2 million, led by $297.2 million of commercial real estate growth and $38.2 million of consumer loan growth; residential real estate declined. Commercial real estate was 38.2% of gross loans at quarter-end.
- Deposits declined $53.1 million. Noninterest-bearing deposits fell $280.7 million, partly offset by growth in interest-bearing deposits; management cited a $364.8 million decrease in servicing deposits.
- Accumulated other comprehensive income moved from positive $5.2 million to a loss of $28.0 million, mainly reflecting a $37.0 million after-tax decline in available-for-sale securities. The portfolio had $52.5 million of gross unrealized losses at quarter-end, which management attributed generally to interest-rate movements and considered temporary.
- Allowance for loan losses was $52.9 million, or 0.96% of gross loans, compared with $51.1 million, or 0.98%, at year-end. Net charge-offs were $2.3 million, up from $1.7 million.
- Nonperforming loans rose to $52.9 million from $42.6 million; nonperforming assets were $66.2 million, or 0.90% of assets. A $12.8 million commercial real estate relationship moved to nonaccrual during the quarter.
- Book equity fell $18.9 million despite quarterly net income, primarily because of the securities-related AOCI decline; the company also declared $6.5 million of common dividends and repurchased $1.1 million of stock.
Liquidity, debt, capital, outlook, and risks
At March 31, 2022, borrowings included $60.4 million of short-term borrowings, $310.2 million of FHLB advances and other borrowings, $139.2 million of subordinated debt, and $49.5 million of trust preferred debentures. The company reported unused Federal Reserve Discount Window capacity of $64.8 million and unused federal funds lines of $45.0 million. Regulatory capital ratios exceeded stated minimums; the Bank’s total risk-based capital ratio was 10.73% and its common equity tier 1 ratio was 9.99%. The company and Bank were described as well-capitalized.
Management provided no specific earnings or full-year financial guidance. It cited uncertainty around interest rates, the economy, COVID-19 effects, financial markets, acquisitions, and reference-rate transition. Its interest-rate models projected that a parallel 100-basis-point increase would raise next-12-month net interest income 5.4%, and a 200-basis-point increase would raise it 10.7%; a 100-basis-point decrease would reduce it 5.9%. The economic value of equity model was outside Board policy limits in the -100-basis-point scenario; management said the Bank was reviewing strategies to restore compliance.
- Pending transaction: The company agreed to acquire deposits and certain loans and assets at two FNBC branches in Illinois, with approximately $86 million of deposits and $26 million of loans expected; closing was anticipated in Q2 2022.
- Credit and off-balance-sheet exposures: Commitments to extend credit totaled $1.05 billion and standby letters of credit $14.5 million. COVID-related loan deferrals had declined to $1.1 million from $13.3 million at year-end 2021. PPP loans outstanding were $22.9 million.
- Legal and operational matters: The company reported no material pending legal proceedings or anticipated material losses from ordinary-course claims. No material changes to previously reported risk factors were disclosed.
- Other notable items: Residential mortgage banking revenue declined to $0.6 million from $1.6 million as originations fell. Wealth management revenue increased to $7.1 million, with growth partly attributable to the 2021 ATG Trust acquisition.
Important facts for investors to verify
- Whether commercial real estate loan growth and the increase in nonperforming loans lead to further credit provisions, charge-offs, or allowance changes.
- Whether deposit outflows—particularly servicing deposits—continue, and how loan growth affects cash balances and funding costs.
- How rising rates affect net interest income, deposit pricing, securities values, and the reported AOCI loss; review the EVE policy-limit exception and remediation.
- Whether the FNBC transaction closes as expected and whether its acquired deposits and loans meet stated expectations.
- How much earnings growth is sustainable after accounting for lower mortgage activity, loan discount accretion, and the prior-year funding-cost benefits from debt repayments.